Article
Nakheel Sukuk: World’s Largest Single Sukuk
Issue
By Clifford Chance
Last December, the largest Sukuk to date
was listed on the Dubai International
Financial
Exchange.
The
Shariah
compliant structure was used in Nakheel
Development Ltd’s landmark US$3.52
billion Sukuk.
under Shariah and is a hybrid between
an operating lease and a nance/capital
lease.
The proceeds were invested in the capital
of Nakheel PJSC, the main holding
company of the Nakheel Group, and were
intended to be used for the nancing of
Nakheel’s projects, which include iconic
developments that are well-known beyond
Dubai, such as The Palm Jumeirah.
Nakheel Development used the proceeds
of the Sukuk issue to purchase a longterm leasehold interest in part of the land
at Dubai Waterfront from an entity within
the Nakheel group. This land was then
leased under an Ijarah to another Nakheel
entity, with the rentals being used to make
coupon payments to the Sukuk holders.
Dubai World has guaranteed the payment
obligations due to the issuer.
Nakheel is a subsidiary of Dubai World,
a holding company that manages and
supervises the portfolio of businesses
and projects for the government of Dubai.
Other companies that Dubai World
holds are Istithmar PJSC, an alternative
investment house; Limitless LLC, a real
estate development entity; and DP World.
Upon redemption of the Sukuk, the issuer
has the right to require the lessee to
purchase its long-term leasehold interest
in the Dubai Waterfront land. The purchase
amount payable is calculated in a manner
that will be sufcient to allow the issuer to
pay all amounts due to the Sukuk holders
upon redemption.
“Ijarah is Islamic
nancing’s equivalent of
leasing and may be seen
as a hybrid between
conventional operating
and nance leases”
In addition, the Sukuk holders have certain
priority rights in the event of any public
offering of shares in Nakheel PJSC or its
subsidiaries during the next four years.
The deal
The Sukuk was structured as a Sukuk
al-Ijarah. An Ijarah is a lease agreement
Ijarah structure
This is Ijarah Islamic nancing’s equivalent
of leasing and may be seen as a hybrid
between conventional operating and
nance leases. As with Murabahah
nancings, Ijarah rental payments will
reect an agreed prot element, calculated
using the London Interbank Offered Rate
continued....
7
Legal Guide 2007 www.islamicnancenews.com
Nakheel Sukuk: World’s Largest Single Sukuk Issue (continued..)
(Libor) as a benchmark, and comparisons
with rentals on conventional leases can
readily be made.
There are certain key issues in relation
to using Ijarah so as to ensure that it
is Shariah compliant. One is that the
obligation to insure and undertake any
major maintenance on the leased asset
must remain with the lessor. In addition,
the lessee is only responsible for payment
of rent while the use of the asset continues,
so an issue arises where the lessee is no
longer able to use the leased asset — for
example, due to its total destruction — as
the obligation to make lease payments will
cease.
“There are certain key
issues in relation to
using Ijarah so as to
ensure that it is Shariah
compliant. One is that
the obligation to insure
and undertake any
major maintenance on
the leased asset must
remain with the lessor.”
Principal Islamic documents
The Ijarah Islamic structure used in the
Sukuk combines the use of: (i) purchase/
sale undertakings; (ii) a lease agreement;
and (iii) a service agency agreement.
(i) Purchase agreement
Pursuant to the purchase agreement, the
seller (Nakheel Holdings 1 LLC, one of the
shareholders of Nakheel PJSC) sold to
the issuer a leasehold interest over certain
land, buildings and other property at Dubai
Waterfront (the property) for a term of 50
years. The issuer used the proceeds of
the Sukuk issue to pay the purchase price
for this property. The seller invested the
net proceeds in Nakheel PJSC as share
capital.
(ii) Lease agreement (‘Ijarah’)
The Ijarah was entered into between the
issuer as lessee and Nakheel Holdings
2 LLC (another shareholder of Nakheel
PJSC) as lessor. The Ijarah provided
for the lease of the property during six
consecutive periods of six months. The
lease rental payments were structured to
match the coupon payments to the Sukuk
holders.
If any payment under the lease agreement
is not made when due, the lessee
undertakes to pay an additional amount
calculated on a daily basis. However, any
late payment charge received by the lessor
shall be donated to Red Crescent charity,
being the charity of the lessee’s choice.
(iii) Servicing agency agreement
The parties to the service agency
agreement were Nakheel Holdings 2 LLC
(as servicing agent) and the issuer (as
lessee under Ijarah).
Under the principles of Shariah, a lessor
has certain obligations that it cannot pass
continued....
8
www.islamicnancenews.com Legal Guide 2007
Nakheel Sukuk: World’s Largest Single Sukuk Issue (continued..)
to the lessee under the Ijarah. These
include the obligation to insure the lease
asset, the responsibility to pay property
taxes (other than those imposed by law
against a lessee or tenant) and any major
maintenance and structural repair of the
property. These obligations can, however,
be passed by the lessor to an agent.
To the extent the servicing agent claims any
costs and expenses under the servicing
agency agreement, the lease rentals will
be increased by an equal amount. Any
increased lease rental is offset against
the costs and expenses claimed under the
servicing agency agreement.
(iv) Sukuk assets sale undertaking
The sale undertaking was granted by the
issuer in favor of Nakheel Holdings 1 LLC.
Under this agreement, the issuer agreed
that the leasehold in the property may,
in certain circumstances, be sold back
to the original seller (in whole or in part)
provided that there was a payment in kind
by the seller in the form of similar assets
(payment in kind asset). This mechanism
allows Nakheel to substitute the property in
whole or in part with another similar portion
of land. The replacement land will then be
leased by the issuer to Nakheel Holdings 2
LLC under the Ijarah.
Under the purchase undertaking, Nakheel
Holdings 2 LLC agrees to purchase the
issuer’s interest in the Sukuk assets
at a specied price on a specied date
following the issue of a notice from the
issuer. This notice will be served by the
issuer either upon the occurrence of an
event of default or immediately before the
scheduled redemption date of the Sukuk
certicates, and the Sukuk assets will be
sold to Nakheel Holdings 2 LLC under a
separate sale agreement.
Robin Abraham is a partner, Qudeer Latif
is a senior associate and Shani Long is an
associate in Clifford Chance LLP in Dubai
(v) Purchase undertaking
This undertaking is given by Nakheel
Holdings 2 LLC in favor of the issuer. It is
a key document from a credit perspective
because it allows the certicate holders to
be paid on early termination or at the term
of the Ijarah.
9